My Company

The Supreme Court has been asked to rule on whether employers that offer company stock in their 401(k) plans can be assumed to have acted prudently even if the price of the stock drops steeply.

The solicitor general’s office filed a brief after the court sought its input on Fifth Third Bancorp v. John Dudenhoeffer et al. The solicitor general asked the justices to rule that “courts should not apply a presumption that an [Employee Stock Ownership Plan] fiduciary has acted prudently at any stage of the proceedings.”

The Department of Labor also filed a brief asking the Supreme Court to reverse the decision.

Writing on the blog Class Defense, lawyers Brian Netter and Dan Himmelfarb of Mayer Brown, an international law firm with offices in Washington, D.C., said the court’s ruling would have a huge impact on so-called stock-drop cases.

“With the solicitor general’s recommendation, the Supreme Court is highly likely to grant certiorari,” they wrote. “And …this case stands either to sound the death knell for stock-drop class actions or to start a frenzied wave of such cases.”

The Dudenhoeffer class action lawsuit was filed in 2008 after the bank’s stock dropped 74 percent as the subprime mortgage market imploded. The drop in the stock price caused the assets in the retirement plan to lose millions of dollars in value.

The suit claimed the company breached its fiduciary duty by not protecting employees from needless losses. It also alleged that Securities and Exchange Commission filings incorporated into retirement plan documents failed to disclose the bank’s potential financial problems as required by the Employee Retirement Income Security Act.

In September 2012, the 6th U.S. Circuit Court of Appeals in Cincinnati overturned an Ohio federal court’s decision in favor of Fifth Third. The court wrote that Dudenhoeffer “plausibly alleges defendants breached their fiduciary duties by intentionally incorporating Fifth Third’s SEC filings” into retirement plan documents “thereby conveying misleading information to plan participants.”

Complicating the case is the fact that the 6th Circuit’s ruling is at odds with rulings by other circuit courts. The 2nd Circuit Court of Appeals In New York City, for instance, in three cases has ruled in favor of plan sponsors sued by employees when the price of company stock dropped.